October 24, 2007
Princeton Lawsuit Puts Spotlight on Nonprofit Governance Issue
By Ben Gose
Several disputes in the lawsuit over the Robertson Foundation touch on issues of governance that affect many nonprofit organizations.
William Robertson, his two sisters, and another relative are suing Princeton University, saying that the university has not adhered to the terms of a gift the siblings’ parents made in 1961 to endow the graduate programs at the Woodrow Wilson School of Public and International Affairs. The gift established a supporting organization to Princeton, known as the Robertson Foundation, with a mission of training graduate students to work in the federal government, particularly in foreign affairs.
Under the document that established the Robertson Foundation, Princeton was given effective control of the foundation with four of the seven board seats. The Robertsons argue that the Princeton-appointed members of the Robertson Foundation board have a conflict of interest any time they conduct business, such as making grants, because they are also trustees or officers of the university.
But Princeton’s lawyers say that the Internal Revenue Code requires that the supported organization, Princeton, control the supporting organization, the Robertson Foundation. That’s the main reason why Princeton has a majority of the board seats on the foundation, they say.
Roughly 45,000 supporting organizations exist in the United States. Donors receive greater tax benefits when they give to a supporting organization, which must be controlled by a public charity, than if they create a separate foundation because the perceived risk of abuse is lesser with supporting organizations than with private foundations.
“What the plaintiffs are trying to do here is to convince a court to change the way a supporting organization is governed under federal tax law,” says Cass Cliatt, a Princeton spokeswoman.
Spending Decisions
The Robertsons are also trying to limit spending from the Robertson Foundation to interest and dividends. The foundation adhered to that standard for the first three decades of its existence, but it began spending capital gains in 1992, after the board gave consensus approval to the change, according to Princeton.
Princeton officials believe the Robertsons want to abandon current policy so that they can hoard assets in the event they are able to persuade the judge in the case to give them control over the foundation’s money.
Mr. Malone, the Robertsons’ lawyer, says the Robertsons want spending restricted to dividends and income because they believe Princeton began directing increasing amounts of funds to projects unrelated to the Robertson Foundation mission when it began spending capital gains in 1992.
“Once they were able to ignore the dividends and interest restriction, the lid really came off the cookie jar,” Mr. Malone says.
Princeton officials say the 1992 change didn’t affect what they spent money on. They say the Uniform Management of Institutional Funds Act — known as Umifa — permits the spending of capital gains unless a written “override” in the governing documents prohibits such spending.
The wording in the Certificate of Incorporation is hard to parse; expert witnesses for Princeton and the Robertsons came to different conclusions about whether it permits the spending of capital gains. Ultimately, the decision will likely come down to the judge’s reading of the confusing language about spending policy in the Certificate of Incorporation.
‘Surplus’ Debate
The Robertsons have also suggested that Princeton has a surplus of funds for operating the graduate programs at the Wilson school, and that the excess should be used to support other programs that conform to the Robertson Foundation mission.
“If you cannot practicably spend all of this money on 165 graduate students, the court can take what it regards to be a surplus and devote it to purposes as close as possible to what the donor specified, “ Mr. Malone says. “Then it’s up to the judge to decide if control of the surplus goes to Princeton or to Mr. Robertson to give to other universities to support government service.”
But Princeton’s lawyers argue that this legal concept, known as cy-pres, may only be invoked to modify the terms of a gift where a court determines that it has become “illegal, impracticable, or impossible” to satisfy the original purposes of the gift.
Princeton argues that it has plenty of current and future uses for the Robertson Foundation money. It points to a new program it started this spring called Scholars in the Nation’s Service, which provides scholarships, salary, and education to exceptional college juniors who agree to work for two years in the federal government before returning to the Wilson school for a graduate degree.
Harvey P. Dale, director of the National Center on Philanthropy and the Law, at New York University, and an expert witness for Princeton, says any decision that strips the Robertson Foundation of a perceived surplus would essentially be punishing the university for years of stellar investment returns.
“It would create the following very strange result — a charity that handles and manages its assets prudently and well would have to turn over those prudently managed funds to a competitor,” he says.
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